Path 2

Path 2

The Other Budget Culprit

November 26, 2002

The happiest man in town last week had to be Rudolph W. Giuliani, who got to announce the latest and richest deal yet for his consulting firm, Giuliani Partners. Investors in Worldcom, the integrity-challenged telecommunications giant, hired the ex-Mayor to help clean up its image, a deal that could be worth millions of dollars, according to financial observers.

Giuliani is seen as the new white knight for troubled corporations, the Times reported; “the crème de la crème of clean,” as one arbitrageur put it.

The former mayor has enjoyed the benefits of both the bull market and the bear market on Wall Street. As mayor, he presided over the city at a time when the stock boom swelled city coffers, providing five straight years of billion-dollar-plus budget surpluses that greased his term in office and helped him avoid the toughest budget crunches. Now that the stock bubble has burst, the hero of 9-11 is now in a position to profit as a private consultant to those same Wall Street entities as they struggle to pick up the pieces.

Private citizen Giuliani has to be happier still that as the current city administration wrestles with a mammoth budget crisis, his own contribution to those fiscal woes has largely escaped scrutiny. Giuliani’s approval ratings remain sky-high, while those of Mayor Mike Bloomberg, the one struggling with the deficits, have plummeted as he talks bluntly about the need for cuts.

An infinitely courteous Bloomberg has so far declined most finger-pointing, especially at Giuliani, whose endorsement last year helped win him office. The City Council leadership has been similarly reticent. The reasoning in both wings of City Hall is presumably that little purpose is served in riling the enormously popular former mayor, possibly sending him off on a diatribe of his own.

Giuliani himself worried about none of those courtesies when he took office, repeatedly accusing former mayor David Dinkins of exacerbating city fiscal problems and then hiding them.

Budget analysts say, however, that the Giuliani contributions were manifold.

“He dug a deep fiscal ditch,” said Harvey Robins, a budget watchdog who served as an aide to the Koch and Dinkins administrations. “There were a number of choices Rudy could have made to improve things, but he preferred either to ignore long-standing problems or deny their existence.”

“While 9-11 and the recession certainly bear some of the blame for the city’s fiscal plight, the Giuliani administration failed to address the fundamental structural imbalance in our finances,” said Doug Turetsky of the city’s Independent Budget Office. “In fact, that imbalance may have worsened in the latter years of his term as recurring expenditures grew faster than sustainable tax revenues.”

The city’s five consecutive years of record earnings are the most in its history, according to the Citizens Budget Commission, a nonprofit fiscal analysis organization. “They dwarfed anything in the past,” said Diana Fortuna, president of the organization. The surplus was a whopping $3.2 billion in fiscal year 2000, and $2.9 billion in fiscal 2001.

“I think it was a conscious decision to develop a surplus,” said Fortuna. “They used conservative revenue forecasts and the surplus would keep getting bigger. Then they would say, ‘We are going to use it in next year’s budget.’ We’d say, ‘This is a giant one-shot deal and you won’t have it there when we need it, and there will be a bigger budget gap.’ ”

When recession hit in late 2001, the surplus was suddenly needed. “That is part of why we have such a large gap now,” said Fortuna. “If we had been living within our resources in the late ’90s, we would have a gap that is $2 billion less today.”

Another way to handle the surplus might have been to pump it into projects aimed at productivity savings, said Turetsky. “It is when you have surpluses that you are best able to invest in productivity changes that make the workforce function more efficiently,” he said.

For example, the IBO suggested, the city could have invested in dual-bin sanitation trucks—a common sight outside the city—that would have enabled the city to cut an entire separate recycling pickup. Or, in another widely used and cost-efficient sanitation method, the city could have equipped sanit trucks with metal arms for overhead pickups of standard street containers, an improvement over current labor-intensive procedures.

City expenses also grew during Giuliani’s term. The Republican mayor came into office vowing to reduce the size and cost of government. He made good on the pledge during his first term, bringing overall city spending down by 2 percent. But the second term was a different story. City expense spending (not including state and federal contributions) rose by 6 percent in 1998, 4 percent in 1999, another 6 percent in 2000, and, finally, an added 9 percent in the Giuliani administration’s last full year, according to the Independent Budget Office. In the last five years of the Giuliani administration, spending grew at twice the rate of inflation.

Debt service, which represented just 5 percent of the city’s budget at the beginning of his administration, accounted for 17 percent of the city’s budget by the time he left office.

“There were two Rudys when it came to spending,” said Turetsky of the IBO. “He was frugal in his first term, and then things were different.”

After dropping in number during Giuliani’s first term, the city’s workforce also grew in his second term. By the time Giuliani left office, the workforce had increased by 6600 full-time positions, according to the Citizens Budget Commission.

Wages and salaries rose by nearly 10 percent during Giuliani’s second term, the largest per-worker increase since the mid 1980s, the CBC found. Police overtime, much of it connected to the Operation Condor surveillance tactics, rose by 115 percent between fiscal years 1998 and 2001.

At the same time that costs were rising, however, Giuliani cut taxes, reducing tariffs on hotel occupancy and commercial rent, and eliminating the charge for clothing sales of under $110. The clothes tax alone cost the city almost $110 million a year in revenue, the CBC estimated.

There were also decisions that created enormous new pressures on the budget.

One was Giuliani’s 2001 shutdown of the Fresh Kills landfill. The move was a going-away present to the borough of Staten Island, which put him in office in 1993 by giving him an 89,000 vote plurality over Dinkins. The decision to close was made even before firm plans were in place for an effective new means of getting rid of the city’s trash. The short-term solution has been an expensive system of exporting the city’s garbage to out-of-state landfills. That action alone will cost the city more than $235 million this year in added costs, according to the city’s IBO.

“That’s the equivalent of the entire Parks Department budget and all the cuts now targeted at libraries,” said Robins.

Another involved the city’s employee pension funds. When the value of the funds soared with Wall Street earnings in the late ’90s, Giuliani moved to cut the city’s contributions by more than $800 million over a two-year period from 2000 to 2001. Then city comptroller and pension fund trustee Alan Hevesi vigorously opposed the move, saying that the funds’ surpluses needed to be saved for the future when the stock market would inevitably decline. The impact of the Giuliani-era reductions means that the city now has to pay more into the funds in order to meet demands, according to the CBC.

“They took a onetime savings,” said Fortuna of the CBC. “And they did it in the years they least needed to do so. You are now seeing the pension costs going through the roof over the next four years.”